The commission report, while naming no specific offenders, vowed to open antitrust cases in coming months. In the meantime, it urged credit-card companies such as Visa International and MasterCard Inc. (MA) and the retail banks that issue these cards to take voluntary measures to bring down fees. But it does not demand specific reductions.

The commission already has long-running antitrust cases open against both Visa and MasterCard.

"Something is rotten in the state" of bank cards, said E.U. Competition Commissioner Neelie Kroes, promising action against offending banks "as soon as possible." She could not "wait too long" because retailers and consumers "are being ripped off."

The commission's efforts to lower credit and bank-card fees are aimed at integrating the E.U.'s banking sector, which remains fragmented despite the advent of the euro. By 2010, the commission wants to have a framework to allow businesses and customers to make cross-border electronic payments as easily, and at the same cost as within their own country.

Since taking office in November 2004, E.U. Commissioner Kroes has initiated two main investigations: a wide-ranging look at the financial sector and a similar study of Europe's energy market.

Earlier this month, Kroes' final report on the energy-sector probe showed the E.U.'s gas and electricity prices are unreasonably high because of limited cross-border integration and overly dominant former state-owned monopolies. Like the report on credit cards, the energy inquiry didn't name and shame monopolies, but some sections showing high market shares in specific countries pointed to companies such as Electricite de France SA (1024251.FR) and Germany's E.ON AG (EON).

In the card business large national players dominate. Some electronic-payment companies are national monopolies, a situation the commission's report is expected to broadly criticize. For instance, Belgium's Banksys -formed as a partnership of the country's largest retail banks and now owned by French information technology company Atos Origin SA (5173.FR) -handles all of the country's electronic payments. Banksys issues the card readers that stores and restaurants use to process credit and bank-card payments and also controls the country's automated teller machines.

The banks are required to join a new pan-E.U. payment-card-processing network by 2010, replacing the country-by-country systems now in place. Card-processing networks run by banks in the E.U. countries demand high prices for cross-border transactions. These inefficiencies cost consumers up to EUR100 billion a year, the commission says.

The European payment cards industry is large and provides the means for consumer payments with an overall value of EUR1.35 trillion a year, the commission said. Such payments generate an estimated EUR25 billion in fees annually for banks from E.U. firms.

The commission's findings follow a survey of 250 banks providing payment cards. It underlines the commission's fears that the European way of doing business might involve too many friendly agreements and too little competition, and cited a number of barriers to cross-border integration and increased competition.

The commission said markets in many countries are "highly concentrated," enabling "incumbent banks to restrict new entry and charge high card fees." Retailers in countries "with high fees have to pay banks three-or-four times more of their revenue from card sales than firms in Member States with low fees," it said. The problem is a lack of cross border competition between banks.

The "high and sustained profitability -particularly in card issuing - suggests that banks in some Member States enjoy significant market power and could impose high card fees on firms and consumers," the commission said.

Other problems include the high cost of switching to another bank in some countries and national legislation that prevent foreign takeovers of certain types of banks, the commission said. Only between 5% and 7% of E.U. consumers changed their current account in 2005, the commission said.

In addition, divergent national "technical standards" prevent "many service providers from operating efficiently on a pan-E.U. scale," the commission added.

The commission praised some banks for taking voluntary measures to limit high credit card fees. In particular, it said Austrian and Portuguese banks are reducing fees.

"These initiatives in Austria and Portugal are welcome first steps," the commission said. "However, the commission will continue to screen these markets."

Visa and MasterCard both set the fees that banks which issue their cards must pay to merchants' banks for transactions, though both say they draw no revenue from the fees. The companies have long insisted that if the commission abolishes the fees, or forces them either too high or too low, banks would either refuse to keep issuing their cards or merchants would refuse to accept them.

Both companies Wednesday said they were pleased and relieved by the report, as it seems to keep the present system of interchange fees set by credit card companies intact.

"I think interchange will continue in a similar direction that we have today - the commission understands that interchange has a significant role to play," said Steve Perry, executive vice president, relationship management of Visa Europe.

The report shows a "softening" from the commission's earlier threats that it might abolish the fees or ban credit card companies from setting them, according to MasterCard Europe President Javier Perez.

However, Perez lamented that the "cloud of uncertainty" created by the commission's inquiry into the sector remains. This uncertainty, Perez charged, is stalling investments needed to build the single, united European payments market.

Investors currently "won't move a finger" to unroll new services and products in the E.U., Perez said, adding that "banks may hesitate to continue to invest in (the single European payments area), while the European Commission debates what to do with interchange fees."

France has seven separate national bank card networks and polls show that three quarters of the French public believes there is "strong competition" in the bank card market, the French bankers' association said in a statement. Although French legislation forbids foreign banks from having access to the electronic card infrastructure, this is necessary to insure the system's security, the association added.

None of these arguments are likely to find much sympathy in the European Parliament.

"The high and opaque card fees that we often all have to pay (whether we know it or not) are the result of market dominance of the big players," said Sharon Bowles, a member of the European parliament, who is the shadow rapporteur for the payments service legislation now before parliament. "It is a real warning. I am certain if credit card companies don't act now, legislation will follow," she said.

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